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Embassy Bancorp, Inc. - Quarter Report: 2013 June (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013 OR

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________________ TO __________________

 

Commission file number 000-1449794

 

 

 

Embassy Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

Pennsylvania

26-3339011

(State of incorporation)

(I.R.S. Employer Identification No.)

 

 

One Hundred Gateway Drive, Suite 100

Bethlehem, PA

 

18017

(Address of principal executive offices)

(Zip Code)

 

 

(610) 882-8800

(Issuer’s Telephone Number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes  x No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer

Non-accelerated filer  (Do not check if a smaller reporting company) 

Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 or the Exchange Act.)  Yes   No x

 

Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date:

 

 

 

 

COMMON STOCK

 

 

Number of shares outstanding as of August 9, 2013

($1.00 Par Value)

       7,247,587

 

  (Title Class)

(Outstanding Shares)

 

 




 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

 

Table of Contents

 

 

 

Part I – Financial Information 

3

 

 

Item 1 – Financial Statements 

 

   Consolidated Balance Sheets (Unaudited)

3

 Consolidated Statements of Income (Unaudited)

4

 Consolidated Statements of Comprehensive Income (Unaudited)

5

       Consolidated Statements of Stockholders’ Equity (Unaudited)

6

       Consolidated Statements of Cash Flows (Unaudited)

7

       Notes to Consolidated Financial Statements (Unaudited)

8

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 

28

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk 

39

 

 

Item 4 – Controls and Procedures 

39

 

 

Part II - Other Information 

40

 

 

Item 1 - Legal Proceedings 

40

 

 

Item 1A - Risk Factors 

40

 

 

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 

40

 

 

Item 3 - Defaults Upon Senior Securities 

40

 

 

   Item 4 – Mine Safety Disclosures

40

 

 

Item 5 - Other Information 

40

 

 

Item 6 - Exhibits 

40

EXHIBIT 31.1

   

EXHIBIT 31.2

   

EXHIBIT 32

   

 

2

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Part I – Financial Information

 

Item 1 – Financial Statements

 

Consolidated Balance Sheets (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

ASSETS

2013

 

2012

 

 

 

 

 

 

 

(In Thousands, Except Share and Per Share Data)

Cash and due from banks

$

16,185 

 

$

16,116 

Interest bearing demand deposits with banks

 

1,062 

 

 

12,824 

Federal funds sold

 

1,000 

 

 

1,000 

 

 

 

 

 

 

Cash and Cash Equivalents

 

18,247 

 

 

29,940 

 

 

 

 

 

 

Interest bearing time deposits

 

4,141 

 

 

5,945 

Securities available for sale

 

78,145 

 

 

91,857 

Restricted investment in bank stock

 

1,885 

 

 

1,454 

Loans receivable, net of allowance for loan losses of $5,069 in 2013; $5,147 in 2012

 

528,333 

 

 

500,072 

Premises and equipment, net of accumulated depreciation

 

1,927 

 

 

2,095 

Bank owned life insurance

 

5,075 

 

 

4,976 

Accrued interest receivable

 

1,639 

 

 

1,578 

Other real estate owned

 

2,639 

 

 

3,038 

Other assets

 

2,858 

 

 

2,054 

 

 

 

 

 

 

Total Assets

$

644,889 

 

$

643,009 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing

$

51,847 

 

$

51,741 

Interest bearing

 

492,904 

 

 

501,279 

 

 

 

 

 

 

Total Deposits

 

544,751 

 

 

553,020 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

30,699 

 

 

24,452 

Short-term borrowings

 

7,750 

 

 

 -

Long-term borrowings

 

7,352 

 

 

12,586 

Accrued interest payable

 

266 

 

 

327 

Other liabilities

 

3,539 

 

 

2,597 

 

 

 

 

 

 

Total Liabilities

 

594,357 

 

 

592,982 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

Common stock, $1 par value; authorized 20,000,000 shares;

 

 

 

 

 

2013 issued 7,247,587 shares; outstanding 7,247,587 shares;

 

 

 

 

 

2012 issued 7,238,823 shares; outstanding 7,238,823 shares

 

7,248 

 

 

7,239 

Surplus

 

23,228 

 

 

23,146 

Retained earnings

 

19,440 

 

 

17,360 

Accumulated other comprehensive income

 

616 

 

 

2,282 

 

 

 

 

 

 

Total Stockholders' Equity

 

50,532 

 

 

50,027 

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

$

644,889 

 

$

643,009 

 

 

 

 

See notes to consolidated financial statements.

3

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Consolidated Statements of Income (Unaudited) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST INCOME

 

(In Thousands, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable, including fees

 

$

5,593 

 

$

5,399 

 

$

11,079 

 

$

10,706 

 

Securities, taxable

 

 

211 

 

 

312 

 

 

433 

 

 

640 

 

Securities, non-taxable

 

 

289 

 

 

343 

 

 

578 

 

 

656 

 

Federal funds sold, and other

 

 

 

 

25 

 

 

 

 

53 

 

Interest on time deposits

 

 

 

 

26 

 

 

23 

 

 

53 

 

Total Interest Income

 

 

6,103 

 

 

6,105 

 

 

12,119 

 

 

12,108 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

589 

 

 

865 

 

 

1,213 

 

 

1,868 

 

Securities sold under agreements to repurchase and federal funds purchased

 

 

 

 

17 

 

 

 

 

43 

 

Short-term borrowings

 

 

 

 

 -

 

 

 

 

 -

 

Long-term borrowings

 

 

148 

 

 

174 

 

 

312 

 

 

352 

 

Total Interest Expense

 

 

742 

 

 

1,056 

 

 

1,535 

 

 

2,263 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

 

5,361 

 

 

5,049 

 

 

10,584 

 

 

9,845 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

 

252 

 

 

445 

 

 

532 

 

 

575 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income after

 

 

 

 

 

 

 

 

 

 

 

 

 

    Provision for Loan Losses

 

 

5,109 

 

 

4,604 

 

 

10,052 

 

 

9,270 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit card processing fees

 

 

355 

 

 

280 

 

 

677 

 

 

566 

 

Other service fees

 

 

145 

 

 

113 

 

 

273 

 

 

218 

 

Bank owned life insurance

 

 

50 

 

 

 -

 

 

99 

 

 

 -

 

Profit (loss) on sale of other real estate owned

 

 

 

 

 -

 

 

10 

 

 

(8)

 

Impairment on other real estate owned

 

 

(74)

 

 

 -

 

 

(80)

 

 

(100)

 

Total Other Income

 

 

482 

 

 

393 

 

 

979 

 

 

676 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

1,715 

 

 

1,426 

 

 

3,447 

 

 

2,914 

 

Occupancy and equipment

 

 

583 

 

 

555 

 

 

1,174 

 

 

1,157 

 

Data processing

 

 

326 

 

 

272 

 

 

631 

 

 

539 

 

Credit card processing

 

 

317 

 

 

244 

 

 

602 

 

 

493 

 

Advertising and promotion

 

 

230 

 

 

236 

 

 

451 

 

 

424 

 

Professional fees

 

 

129 

 

 

142 

 

 

255 

 

 

249 

 

FDIC insurance

 

 

112 

 

 

101 

 

 

216 

 

 

188 

 

Insurance

 

 

13 

 

 

12 

 

 

27 

 

 

24 

 

Loan & Real Estate

 

 

41 

 

 

54 

 

 

91 

 

 

103 

 

Charitable contributions

 

 

120 

 

 

111 

 

 

280 

 

 

253 

 

Other real estate owned expenses

 

 

21 

 

 

18 

 

 

44 

 

 

44 

 

Other

 

 

228 

 

 

207 

 

 

442 

 

 

342 

 

Total Other Expenses

 

 

3,835 

 

 

3,378 

 

 

7,660 

 

 

6,730 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before Income Taxes

 

 

1,756 

 

 

1,619 

 

 

3,371 

 

 

3,216 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

 

492 

 

 

438 

 

 

929 

 

 

865 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

1,264 

 

$

1,181 

 

$

2,442 

 

$

2,351 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

0.17 

 

$

0.16 

 

$

0.34 

 

$

0.33 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE

 

$

0.17 

 

$

0.16 

 

$

0.34 

 

$

0.33 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS PER SHARE

 

$

0.05 

 

$

0.04 

 

$

0.05 

 

$

0.04 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

4

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

 

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

Net Income

$

 

 

1,264 

 

$

 

 

1,181 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains on securities available for sale

 

(2,456)

 

 

 

 

371 

 

 

Less: reclassification adjustment for realized gains (losses)

 

 -

 

 

 

 

 -

 

 

 

 

(2,456)

 

 

 

 

371 

 

 

Income tax effect

 

835 

 

 

 

 

(126)

 

 

Net unrealized (losses) gains

 

(1,621)

 

 

 

 

245 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (losses) income, net of tax

 

 

 

(1,621)

 

 

 

 

245 

 

 

 

 

 

 

 

 

 

 

Comprehensive (Loss) Income

 

 

$

(357)

 

 

 

$

1,426 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

Net Income

$

 

 

2,442 

 

$

 

 

2,351 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains on securities available for sale

 

(2,524)

 

 

 

 

465 

 

 

Less: reclassification adjustment for realized gains (losses)

 

 -

 

 

 

 

 -

 

 

 

 

(2,524)

 

 

 

 

465 

 

 

Income tax effect

 

858 

 

 

 

 

(158)

 

 

Net unrealized (losses) gains

 

(1,666)

 

 

 

 

307 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (losses) income, net of tax

 

 

 

(1,666)

 

 

 

 

307 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

 

$

776 

 

 

 

$

2,658 

 

 

 

See notes to consolidated financial statements.

 

 

5

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Consolidated Statements of Stockholders’ Equity (Unaudited)

 

Six Months Ended June 30, 2013 and 2012 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common

 

 

 

 

Retained

 

Comprehensive

 

Treasury

 

 

 

 

Stock

 

Surplus

 

Earnings

 

Income

 

Stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands, Except Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE - DECEMBER 31, 2011

$

7,171 

 

$

22,872 

 

$

11,905 

 

$

2,388 

 

$

(3)

 

$

44,333 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 -

 

 

 -

 

 

2,351 

 

 

 -

 

 

 -

 

 

2,351 

Other comprehensive income

 

 -

 

 

 -

 

 

 -

 

 

307 

 

 

 -

 

 

307 

Dividend declared, $.04 per share

 

 -

 

 

 -

 

 

(287)

 

 

 -

 

 

 -

 

 

(287)

Exercise of stock options, 4,075 shares

 

 

 

12 

 

 

 -

 

 

 -

 

 

 -

 

 

16 

Tax benefit of stock options exercised

 

 -

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

Stock tendered for funding exercise of stock options,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,098 shares

 

(1)

 

 

(7)

 

 

 -

 

 

 -

 

 

.

 

 

(8)

Compensation expense recognized on stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

options

 

 -

 

 

17 

 

 

 -

 

 

 -

 

 

 -

 

 

17 

Common stock grants to directors,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,992 shares

 

 

 

48 

 

 

 -

 

 

 -

 

 

 -

 

 

56 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE - JUNE 30, 2012

$

7,182 

 

$

22,943 

 

$

13,969 

 

$

2,695 

 

$

(3)

 

$

46,786 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE - DECEMBER 31, 2012

$

7,239 

 

$

23,146 

 

$

17,360 

 

$

2,282 

 

$

 -

 

$

50,027 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 -

 

 

 -

 

 

2,442 

 

 

 -

 

 

 -

 

 

2,442 

Other comprehensive loss

 

 -

 

 

 -

 

 

 -

 

 

(1,666)

 

 

 -

 

 

(1,666)

Dividend declared, $.05 per share

 

 -

 

 

 -

 

 

(362)

 

 

 -

 

 

 -

 

 

(362)

Compensation expense recognized on stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 options

 

 -

 

 

29 

 

 

 -

 

 

 -

 

 

 -

 

 

29 

Common stock grants to directors,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 8,764 shares

 

 

 

53 

 

 

 -

 

 

 -

 

 

 -

 

 

62 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE - JUNE 30, 2013

$

7,248 

 

$

23,228 

 

$

19,440 

 

$

616 

 

$

 -

 

$

50,532 

 

 

See notes to consolidated financial statements.

 

 

6

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

2013

 

2012

 

 

 

 

 

 

 

(In Thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

$

2,442 

 

$

2,351 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

532 

 

 

575 

Accretion of deferred loan costs

 

(52)

 

 

(26)

Depreciation and amortization

 

300 

 

 

324 

Net amortization of investment security premiums and discounts

 

171 

 

 

198 

Stock compensation cxpense

 

29 

 

 

73 

(Gain) loss on sale of other real estate owned

 

(10)

 

 

Impairment on other real estate owned

 

80 

 

 

100 

Income on bank owned life insurance

 

(99)

 

 

 -

Increase in accrued interest receivable

 

(61)

 

 

(145)

Increase in other assets

 

(804)

 

 

(392)

Decrease in accrued interest payable

 

(61)

 

 

(183)

Increase in other liabilities

 

1,061 

 

 

239 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

3,528 

 

 

3,122 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Maturities, calls and principal repayments of securities available for sale

 

11,017 

 

 

(8,570)

Proceeds from sales of securities available for sale

 

 -

 

 

3,659 

Net increase in loans

 

(28,302)

 

 

(38,803)

Net (purchases) redemption of restricted investment in bank stock

 

(431)

 

 

156 

Net maturities (purchases) of interest bearing time deposits

 

1,804 

 

 

(19)

Proceeds from sale of other real estate owned

 

329 

 

 

311 

Purchases of premises and equipment

 

(132)

 

 

(447)

 

 

 

 

 

 

Net Cash Used in Investing Activities

 

(15,715)

 

 

(43,713)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in deposits

 

(8,269)

 

 

53,334 

Net increase (decrease) in securities sold under agreements to repurchase and federal funds purchased

 

6,247 

 

 

(9,670)

Increase in short-term borrowed funds

 

7,750 

 

 

 -

Payment of long-term borrowed funds

 

(5,234)

 

 

(100)

Exercise of stock options, net payment for stock tendered

 

 -

 

 

Tax benefit of stock options exercised

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Provided by Financing Activities

 

494 

 

 

43,573 

 

 

 

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

 

(11,693)

 

 

2,982 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS - BEGINNING

 

29,940 

 

 

46,135 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS - ENDING

$

18,247 

 

$

49,117 

 

 

 

 

 

 

SUPPLEMENTARY CASH FLOWS INFORMATION

 

 

 

 

 

Interest paid

$

1,596 

 

$

2,446 

 

 

 

 

 

 

Income taxes paid

$

1,225 

 

$

1,175 

 

 

 

 

 

 

Other real estate sold through bank financing

$

439 

 

$

 -

 

 

 

 

 

 

Deferral of gain from sale of other real estate sold through bank financing

$

110 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

7

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

 Note 1 – Basis of Presentation

 

Embassy Bancorp, Inc. (the “Company”) is a Pennsylvania corporation organized in 2008 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Company was formed for purposes of acquiring Embassy Bank For The Lehigh Valley (the “Bank”) in connection with the reorganization of the Bank into a bank holding company structure, which was consummated on November 11, 2008. Accordingly, the Company owns all of the capital stock of the Bank, giving the organization more flexibility in meeting its capital needs as the Company continues to grow. Embassy Holdings, LLC (the “LLC”) is a wholly-owned subsidiary of the Bank organized to engage in the holding of property acquired by the Bank in satisfaction of debts previously contracted.  As such, the consolidated financial statements contained herein include the accounts of the Company, the Bank and the LLC. All significant intercompany transactions and balances have been eliminated.

 

The Bank, which is the Company’s principal operating subsidiary, was originally incorporated as a Pennsylvania bank on May 11, 2001 and opened its doors on November 6, 2001. It was formed by a group of local business persons and professionals with significant prior experience in community banking in the Lehigh Valley area of Pennsylvania, the Bank’s primary market area.

 

The accompanying unaudited financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“US GAAP”) for interim financial information and in accordance with instructions for Form 10-Q and Rule 10-01 of the Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

 

The consolidated financial statements presented in this report should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2012, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 28, 2013.  

 

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after June 30, 2013 through the date these consolidated financial statements were issued.

 

 

Note 2 - Summary of Significant Accounting Policies

 

The significant accounting policies of the Company as applied in the interim financial statements presented are substantially the same as those followed on an annual basis as presented in the Company’s Form 10-K for the year ended December 31, 2012.

 

Note 3 – Stockholders’ Equity

 

On November 11, 2008, the Company consummated its acquisition of Embassy Bank For The Lehigh Valley pursuant to a Plan of Merger and Reorganization dated April 18, 2008, pursuant to which the Bank was reorganized into a bank holding company structure. At the effective time of the reorganization, each share of common stock of Embassy Bank For The Lehigh Valley issued and outstanding was automatically converted into one share of Company common stock. The issuance of Company common stock in connection with the reorganization was exempt from registration pursuant to Section 3(a)(12) of the Securities Act of 1933, as amended.

 

Note 4 – Stock Incentive Plan

 

At the Company’s annual meeting on June 16, 2010, the shareholders approved the Embassy Bancorp, Inc. 2010 Stock Incentive Plan (the “SIP”).  The SIP authorizes the Board of Directors, or a committee authorized by the Board of Directors, to award a stock based incentive to (i) designated officers (including officers who are directors) and other designated employees at the Company and its subsidiaries, and (ii) non-employee members of the Board of Directors and advisors and consultants to the Company and its subsidiaries.  The Board of Directors believes that the SIP will encourage the designated participants to contribute materially to the growth of the Company. The SIP provides for stock based incentives in the form of incentive stock options as provided in Section 422 of the Internal Revenue Code of 1986, non-qualified stock options, stock appreciation rights, restricted stock and deferred stock awards.  The term of the option, the amount of time for the option to vest after grant, if any, and other terms and limitations will be determined at the time of grant. Options granted under the SIP may not have an exercise period that is more than ten years from the time the option is granted. 

 

8

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 4 – Stock Incentive Plan (Continued)

 

At inception, the aggregate number of shares available for issuance under the SIP was 500,000.  The SIP provides for appropriate adjustments in the number and kind of shares available for grant or subject to outstanding awards under the SIP to avoid dilution in the event of merger, stock splits, stock dividends or other changes in the capitalization of the Company.  The SIP expires on June 15, 2020.  There were no awards granted under the SIP for the years ended December 31, 2011 and 2010.    In February 2013 and 2012, the Company granted 8,764 and 7,992 shares of restricted stock, respectively, to certain members of its Board of Directors as compensation for their service in 2012 and 2011, respectively, in accordance with the Company’s Non-employee Directors Compensation program adopted in October of 2010.  Such compensation was accrued for as of December 31, 2012 and 2011.  In February 2013 and 2012, the Company also granted stock options to purchase 29,742 and 52,611 shares of stock, respectively to certain executive officers in accordance with their respective employment agreements.  Stock compensation expense related to these options was $16 thousand and $29 thousand for the three and six months ended June 30, 2013 and  $11 thousand and $17 thousand for the three and six months ended June 30, 2012, respectively.  At June 30, 2013, approximately $124 thousand unrecognized cost related to stock options granted in 2013 and 2012 will be recognized over the next 2.6 and 1.7 years, respectively.  The fair value of the options granted in 2013 and 2012 was determined with the following weighted average assumptions: dividend yield of 0%,  risk free interest rate of 1.34% and 1.43%, respectively, expected life of 6.0 years and 7.5 years, respectively, and expected volatility of 28.79% and 31.10%, respectively.  The weighted average fair value of options granted in 2013 and 2012 was $2.14 per share and $2.56 per share, respectively.  At June 30, 2013, there were 400,891 shares available for issuance under the SIP.

 

Note 5 – Other Comprehensive Income

 

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss).

The components of other comprehensive income (loss), both before tax and net of tax, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30th,

 

 

 

 

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Before

 

Tax

 

Net of

 

Before

 

Tax

 

Net of

 

 

 

 

 

 

Tax

 

Effect

 

Tax

 

Tax

 

Effect

 

Tax

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains on securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

available for sale

$

(2,456)

 

$

(835)

 

$

(1,621)

 

$

371 

 

$

126 

 

$

245 

 

 

Reclassification adjustments for (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

gains on securities transactions included

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in net income (A),(B)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

Total other comprehensive (loss) income

$

(2,456)

 

$

(835)

 

$

(1,621)

 

$

371 

 

$

126 

 

$

245 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 5 – Other Comprehensive Income (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30th,

 

 

 

 

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Before

 

Tax

 

Net of

 

Before

 

Tax

 

Net of

 

 

 

 

 

 

Tax

 

Effect

 

Tax

 

Tax

 

Effect

 

Tax

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains on securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

available for sale

$

(2,524)

 

$

(858)

 

$

(1,666)

 

$

465 

 

$

158 

 

$

307 

 

 

Reclassification adjustments for (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

gains on securities transactions included

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in net income (A),(B)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

Total other comprehensive (loss) income

$

(2,524)

 

$

(858)

 

$

(1,666)

 

$

465 

 

$

158 

 

$

307 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(A)

Realized gains (losses) on securities transactions included in gain (loss) on sales of securities, net, in the accompanying

 

 

 

Consolidated Statements of Income.

 

 

(B)

Tax effect included in income tax expense in the accompanying Consolidated Statements of Income.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A summary of the accumulated other comprehensive income, net of tax, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities

 

 

 

 

 

 

Available

 

 

 

 

 

 

for Sale

 

 

 

 

 

 

 

 

 

Three Months Ending June 30,

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2013

$

2,237 

 

 

 

Other comprehensive loss before reclassifications

 

(1,621)

 

 

 

Amounts reclassified from accumulated other

 

 

 

 

 

comprehensive income

 

 -

 

 

 

Net other comprehensive loss during the period

 

(1,621)

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2013

$

616 

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2012

$

2,450 

 

 

 

Other comprehensive income before reclassifications

 

245 

 

 

 

Amounts reclassified from accumulated other

 

 

 

 

 

comprehensive income

 

 -

 

 

 

Net other comprehensive income during the period

 

245 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2012

$

2,695 

 

 

 

 

 

 

 

 

 

 

10

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 5 – Other Comprehensive Income (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ending June 30,

 

 

 

 

 

Balance January 1, 2013

$

2,282 

 

 

 

Other comprehensive loss before reclassifications

 

(1,666)

 

 

 

Amounts reclassified from accumulated other

 

 

 

 

 

comprehensive income

 

 -

 

 

 

Net other comprehensive loss during the period

 

(1,666)

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2013

$

616 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2012

$

2,388 

 

 

 

Other comprehensive income before reclassifications

 

307 

 

 

 

Amounts reclassified from accumulated other

 

 

 

 

 

comprehensive income

 

 -

 

 

 

Net other comprehensive income during the period

 

307 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2012

$

2,695 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 6 – Basic and Diluted Earnings per Share

 

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period, as adjusted for stock dividends and splits. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars In Thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,264 

 

$

1,181 

 

$

2,442 

 

$

2,351 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

7,247 

 

 

7,181 

 

 

7,245 

 

 

7,178 

 

 

Dilutive effect of potential common shares, stock options

 

 

 

 

28 

 

 

 

 

28 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average common shares outstanding

 

 

7,252 

 

 

7,209 

 

 

7,250 

 

 

7,206 

 

 

Basic earnings per share

 

$

0.17 

 

$

0.16 

 

$

0.34 

 

$

0.33 

 

 

Diluted earnings per share

 

$

0.17 

 

$

0.16 

 

$

0.34 

 

$

0.33 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options of 149,692 and 122,200 for the three and six months ended June 30, 2013 and 2012, respectively, were not considered in computing diluted earnings per common share because they are not dilutive to earnings.

 

Note 7 – Guarantees

 

The Company, through the Bank, does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank generally holds collateral and/or personal guarantees supporting these commitments. The Company had $5.0 million of standby letters of credit outstanding as of June 30, 2013. The approximate value of underlying collateral upon liquidation that would be expected to

11

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

cover this maximum potential exposure was $4.7 million. Management does not consider the current amount of the liability as of June 30, 2013 for guarantees under standby letters of credit issued to be material.

Note 8 – Short-term and Long-term Borrowings

 

Securities sold under agreements to repurchase, federal funds purchased and Federal Home Loan Bank of Pittsburgh (“FHLB”) short term advances generally represent overnight or less than twelve month borrowings. Long term advances from the FHLB are for periods of twelve months or more and are generally less than sixty months. The Bank has an agreement with the FHLB which allows for borrowings up to a percentage of qualifying assets. At June 30, 2013, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $256.4 million, of which $3.1 million were outstanding in long-term loans, and  $7.8 million were outstanding in short-term loans.  This borrowing capacity with the FHLB includes a line of credit of $25.0 million. Long-term loans with FHLB of $7.9 million were outstanding at December 31, 2012, and there were no short-term advances outstanding from the FHLB at December 31, 2012. All FHLB borrowings are secured by qualifying assets of the Bank.

 

The Bank has a federal funds line of credit with the Atlantic Central Bankers Bank (“ACBB”) of approximately $6.0 million, of which none was outstanding at June 30, 2013 and December 31, 2012. Advances from this line are unsecured.

 

The Company has two lines of credit with Univest Bank and Trust Co. (“Univest”) totaling $10 million. As of June 30, 2013 and December 31, 2012, the outstanding balance was $4.3 million and $4.7 million, respectively. Advances from these lines of credit are secured by 833,333 shares of Bank common stock. Under the terms of the loan agreement, the Bank is required to remain well capitalized. The proceeds of the loan were primarily used for the holding company’s investment in the Bank, thus providing additional capital to support the Bank’s growth.

 

Note 9 – Securities Available For Sale                                                

 

At June 30, 2013 and December 31, 2012, respectively, the amortized cost and approximate fair values of securities available-for-sale were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

June 30, 2013 :

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

$

31,251 

 

$

126 

 

$

(402)

 

$

30,975 

Municipal bonds

 

36,237 

 

 

1,082 

 

 

(224)

 

 

37,095 

U.S. Government Sponsored Enterprise (GSE) -

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities - residential

 

6,475 

 

 

319 

 

 

 -

 

 

6,794 

Corporate Bonds

 

3,249 

 

 

32 

 

 

 -

 

 

3,281 

Total

$

77,212 

 

$

1,559 

 

$

(626)

 

$

78,145 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012 :

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

$

40,386 

 

$

237 

 

$

(18)

 

$

40,605 

Municipal bonds

 

36,273 

 

 

2,696 

 

 

(17)

 

 

38,952 

U.S. Government Sponsored Enterprise (GSE) -

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities - residential

 

8,487 

 

 

530 

 

 

 -

 

 

9,017 

Corporate Bonds

 

3,254 

 

 

29 

 

 

 -

 

 

3,283 

Total

$

88,400 

 

$

3,492 

 

$

(35)

 

$

91,857 

 

12

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 9 – Securities Available For Sale                                                             (Continued)

 

 

The amortized cost and fair value of securities as of June 30, 2013, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without any penalties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

 

Fair

 

 

 

 

Cost

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

12,270 

 

$

12,307 

 

Due after one year through five years

 

 

22,850 

 

 

22,785 

 

Due after five years through ten years

 

 

22,140 

 

 

22,412 

 

Due after ten years

 

 

13,477 

 

 

13,847 

 

 

 

 

70,737 

 

 

71,351 

 

 

 

 

 

 

 

 

 

U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential

 

 

6,475 

 

 

6,794 

 

 

 

$

77,212 

 

$

78,145 

 

 

 

 

 

 

 

 

 

 

There were no sales of securities for the three and six months ended June 30, 2013 and 2012.

 

Securities with a carrying value of $40.2 million and $45.8 million at June 30, 2013 and December 31, 2012, respectively, were subject to agreements to repurchase, pledged to secure public deposits, or pledged for other purposes required or permitted by law.

 

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

Fair Value

 

Unrealized Losses

 

Fair Value

 

Unrealized Losses

 

Fair Value

 

Unrealized Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013 :

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

$

16,828 

 

$

(402)

 

$

 -

 

$

 -

 

$

16,828 

 

$

(402)

Municipal bonds

 

6,935 

 

 

(224)

 

 

 -

 

 

 -

 

 

6,935 

 

 

(224)

Total Temporarily Impaired Securities

$

23,763 

 

$

(626)

 

$

 -

 

$

 -

 

$

23,763 

 

$

(626)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012 :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

$

9,163 

 

$

(18)

 

$

 -

 

$

 -

 

$

9,163 

 

$

(18)

Municipal bonds

 

1,057 

 

 

(17)

 

 

 -

 

 

 -

 

 

1,057 

 

 

(17)

Total Temporarily Impaired Securities

$

10,220 

 

$

(35)

 

$

 -

 

$

 -

 

$

10,220 

 

$

(35)

 

 

The Company had twenty-five (25) securities in an unrealized loss position at June 30, 2013. The unrealized losses are due only to market rate fluctuations. As of June 30, 2013, the Company either has the intent and ability to hold the securities until maturity or market price recovery, or believes that it is more likely than not that it will not be required to sell such securities. Management believes that the unrealized loss only represents temporary impairment of the securities.  None of the individual losses are significant.

13

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 10 – Restricted Investment in Bank Stock

 

Restricted investments in bank stock consist of Federal Home Loan Bank of Pittsburgh (“FHLB”) stock and Atlantic Central Bankers Bank (“ACBB”) stock.  The restricted stocks are carried at cost.  Federal law requires a member institution of the FHLB to hold stock of its district FHLB according to a predetermined formula.

In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of capital stock, and any future capital stock repurchases would be made on a quarterly basis if conditions warrant such repurchases.  During 2012, 2011 and 2010, the FHLB conducted limited excess capital stock repurchases based upon positive quarterly net income.  Any future capital stock repurchases will be made on a quarterly basis if conditions warrant such repurchases.  In connection with this program, the Bank had no stock repurchased during the three and six months ended June 30, 2013,  and stock repurchased at a carrying value of $76 and $156 thousand during the three and six months ended June 30, 2012, respectively.   The Bank was required to purchase additional stock during the three and six months ended June 30, 2013 in the amount of $431 thousand.  No stock purchases were made in the three and six months ended June 30, 2012.  In February 2012, the FHLB announced that dividend payments would resume in 2012, and $1 and $2 thousand was received during the three and six months ended June 30, 2013, respectively.  There were no dividends in the three months ended June 30, 2012, and $1 thousand in the six months ended June 30, 2012.

 

Management evaluates the FHLB and ACBB restricted stock for impairment. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the issuer as compared to the capital stock amount for the issuer and the length of time this situation has persisted, (2) commitments by the issuer to make payments required by law or regulation and the level of such payments in relation to the operating performance of the issuer, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuer.

 

Based upon its evaluation of the foregoing criteria, management believes no impairment charge is necessary related to the FHLB or ACBB stock as of June 30, 2013.

14

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 11Loans Receivable and Credit Quality

 

The following table presents the composition of loans receivable at June 30, 2013 and December 31, 2012, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

Percentage of

 

 

 

Percentage of

 

Balance

 

total Loans

 

Balance

 

total Loans

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

213,588 

 

40.01% 

 

$

204,904 

 

40.53% 

Commercial construction

 

19,987 

 

3.74% 

 

 

19,717 

 

3.90% 

Commercial

 

31,715 

 

5.94% 

 

 

28,696 

 

5.68% 

Residential real estate

 

267,388 

 

50.09% 

 

 

250,854 

 

49.62% 

Consumer

 

1,145 

 

0.22% 

 

 

1,382 

 

0.27% 

 

 

 

 

 

 

 

 

 

 

Total loans

 

533,823 

 

100.00% 

 

 

505,553 

 

100.00% 

Unearned origination fees

 

(421)

 

 

 

 

(334)

 

 

Allowance for loan losses

 

(5,069)

 

 

 

 

(5,147)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

528,333 

 

 

 

$

500,072 

 

 

 

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention (potential weaknesses), substandard (well defined weaknesses) and doubtful (full collection unlikely) within the Company's internal risk rating system as of June 30, 2013 and December 31, 2012, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

Special Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

207,879 

 

$

703 

 

$

4,932 

 

$

74 

 

$

213,588 

Commercial construction

 

16,570 

 

 

902 

 

 

2,515 

 

 

 -

 

 

19,987 

Commercial

 

31,175 

 

 

488 

 

 

52 

 

 

 -

 

 

31,715 

Residential real estate

 

266,112 

 

 

757 

 

 

519 

 

 

 -

 

 

267,388 

Consumer

 

1,145 

 

 

 -

 

 

 -

 

 

 -

 

 

1,145 

            Total

$

522,881 

 

$

2,850 

 

$

8,018 

 

$

74 

 

$

533,823 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

197,879 

 

$

748 

 

$

6,277 

 

$

 -

 

$

204,904 

Commercial construction

 

16,102 

 

 

341 

 

 

3,274 

 

 

 -

 

 

19,717 

Commercial

 

28,066 

 

 

530 

 

 

100 

 

 

 -

 

 

28,696 

Residential real estate

 

249,737 

 

 

156 

 

 

660 

 

 

301 

 

 

250,854 

Consumer

 

1,382 

 

 

 -

 

 

 -

 

 

 -

 

 

1,382 

            Total

$

493,166 

 

$

1,775 

 

$

10,311 

 

$

301 

 

$

505,553 

 

15

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

Note 11Loans Receivable and Credit Quality (Continued)

 

The following table summarizes information in regards to impaired loans by loan portfolio class as of, June 30, 2013 and December 31, 2012, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter to Date

 

Year to Date

 

 

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

 

June 30, 2013

 

 

(In Thousands)

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

6,227 

 

$

6,376 

 

 

 

 

$

6,157 

 

$

74 

 

$

6,100 

 

$

142 

 

  Commercial construction

 

 

2,117 

 

 

2,117 

 

 

 

 

 

2,767 

 

 

 

 

2,550 

 

 

38 

 

  Commercial

 

 

220 

 

 

220 

 

 

 

 

 

255 

 

 

 -

 

 

267 

 

 

 

  Residential real estate

 

 

154 

 

 

154 

 

 

 

 

 

305 

 

 

 -

 

 

356 

 

 

 

  Consumer

 

 

 -

 

 

 -

 

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

953 

 

$

1,234 

 

$

127 

 

$

1,090 

 

$

29 

 

$

1,271 

 

$

65 

 

  Commercial construction

 

 

1,301 

 

 

1,498 

 

 

153 

 

 

650 

 

 

23 

 

 

933 

 

 

23 

 

  Commercial

 

 

11 

 

 

11 

 

 

11 

 

 

11 

 

 

 -

 

 

11 

 

 

 -

 

  Residential real estate

 

 

1,172 

 

 

1,172 

 

 

255 

 

 

914 

 

 

21 

 

 

829 

 

 

26 

 

  Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

7,180 

 

$

7,610 

 

$

127 

 

$

7,247 

 

$

103 

 

$

7,371 

 

$

207 

 

  Commercial construction

 

 

3,418 

 

 

3,615 

 

 

153 

 

 

3,417 

 

 

31 

 

 

3,483 

 

 

61 

 

  Commercial

 

 

231 

 

 

231 

 

 

11 

 

 

266 

 

 

 -

 

 

278 

 

 

 

  Residential real estate

 

 

1,326 

 

 

1,326 

 

 

255 

 

 

1,219 

 

 

21 

 

 

1,185 

 

 

32 

 

  Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

$

12,155 

 

$

12,782 

 

$

546 

 

$

12,149 

 

$

155 

 

$

12,317 

 

$

302 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

5,985 

 

$

5,985 

 

 

 

 

 

 

 

 

 

 

$

6,031 

 

$

301 

 

  Commercial construction

 

 

2,117 

 

 

2,117 

 

 

 

 

 

 

 

 

 

 

 

3,218 

 

 

77 

 

  Commercial

 

 

291 

 

 

291 

 

 

 

 

 

 

 

 

 

 

 

302 

 

 

 

  Residential real estate

 

 

458 

 

 

458 

 

 

 

 

 

 

 

 

 

 

 

377 

 

 

23 

 

  Consumer

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

1,635 

 

$

1,635 

 

$

411 

 

 

 

 

 

 

 

$

1,899 

 

$

161 

 

  Commercial construction

 

 

1,498 

 

 

1,498 

 

 

198 

 

 

 

 

 

 

 

 

749 

 

 

44 

 

  Commercial

 

 

11 

 

 

60 

 

 

11 

 

 

 

 

 

 

 

 

 

 

 -

 

  Residential real estate

 

 

660 

 

 

660 

 

 

130 

 

 

 

 

 

 

 

 

689 

 

 

18 

 

  Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

7,620 

 

$

7,620 

 

$

411 

 

 

 

 

 

 

 

$

7,930 

 

$

462 

 

  Commercial construction

 

 

3,615 

 

 

3,615 

 

 

198 

 

 

 

 

 

 

 

 

3,967 

 

 

121 

 

  Commercial

 

 

302 

 

 

351 

 

 

11 

 

 

 

 

 

 

 

 

307 

 

 

 

  Residential real estate

 

 

1,118 

 

 

1,118 

 

 

130 

 

 

 

 

 

 

 

 

1,066 

 

 

41 

 

  Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 -

 

 

 -

 

 

 

$

12,655 

 

$

12,704 

 

$

750 

 

 

 

 

 

 

 

$

13,270 

 

$

631 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 11Loans Receivable and Credit Quality (Continued)

 

The following table presents non-accrual loans by classes of the loan portfolio as of June 30, 2013 and December 31, 2012, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

  Commercial real estate

$

1,737 

 

$

2,104 

 

  Commercial construction

 

 -

 

 

 -

 

  Commercial

 

49 

 

 

39 

 

  Residential real estate

 

281 

 

 

301 

 

  Consumer

 

 -

 

 

 -

 

      Total

$

2,067 

 

$

2,444 

 

 

 

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The following table presents the classes of the loan portfolio summarized by the past due status as of June 30, 2013 and December 31, 2012, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

30-59 Days Past Due

 

60-89 Days Past Due

 

Greater than 90 Days

 

Total         Past Due

 

Current

 

Total Loan
Receivables

 

Loan Receivables > 90 Days and Accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

Commercial real estate

$

885 

 

$

1,050 

 

$

1,590 

 

$

3,525 

 

$

210,063 

 

$

213,588 

 

$

220 

Commercial construction

 

 -

 

 

1,061 

 

 

1,300 

 

 

2,361 

 

 

17,626 

 

 

19,987 

 

 

1,301 

Commercial

 

 

 

 -

 

 

52 

 

 

56 

 

 

31,659 

 

 

31,715 

 

 

Residential real estate

 

25 

 

 

343 

 

 

280 

 

 

648 

 

 

266,740 

 

 

267,388 

 

 

 -

Consumer

 

13 

 

 

 -

 

 

 -

 

 

13 

 

 

1,132 

 

 

1,145 

 

 

 -

            Total

$

927 

 

$

2,454 

 

$

3,222 

 

$

6,603 

 

$

527,220 

 

$

533,823 

 

$

1,524 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

831 

 

$

 -

 

$

1,809 

 

$

2,640 

 

$

202,264 

 

$

204,904 

 

$

351 

Commercial construction

 

2,559 

 

 

 -

 

 

 -

 

 

2,559 

 

 

17,158 

 

 

19,717 

 

 

 -

Commercial

 

 -

 

 

39 

 

 

10 

 

 

49 

 

 

28,647 

 

 

28,696 

 

 

10 

Residential real estate

 

301 

 

 

 -

 

 

301 

 

 

602 

 

 

250,252 

 

 

250,854 

 

 

 -

Consumer

 

13 

 

 

 -

 

 

 -

 

 

13 

 

 

1,369 

 

 

1,382 

 

 

 -

            Total

$

3,704 

 

$

39 

 

$

2,120 

 

$

5,863 

 

$

499,690 

 

$

505,553 

 

$

361 

 

17

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

Note 11Loans Receivable and Credit Quality (Continued)

 

The following tables detail the activity in the allowance for loan losses for the three and six months ended June 30, 2013 and 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

Commercial Construction

 

Commercial

 

Residential Real Estate

 

Consumer

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ending June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance - March 31, 2013

 

$

1,476 

 

$

490 

 

$

722 

 

$

1,759 

 

$

38 

 

$

526 

 

$

5,011 

 

 

  Charge-offs

 

 

(121)

 

 

 -

 

 

 -

 

 

(74)

 

 

 -

 

 

 -

 

 

(195)

 

 

  Recoveries

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

  Provisions

 

 

335 

 

 

169 

 

 

(300)

 

 

282 

 

 

(6)

 

 

(228)

 

 

252 

 

 

Ending Balance - June 30, 2013

 

$

1,690 

 

$

659 

 

$

423 

 

$

1,967 

 

$

32 

 

$

298 

 

$

5,069 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ending June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance - December 31, 2012

 

$

2,007 

 

$

660 

 

$

394 

 

$

1,677 

 

$

33 

 

$

376 

 

$

5,147 

 

 

  Charge-offs

 

 

(381)

 

 

(197)

 

 

 -

 

 

(74)

 

 

 -

 

 

 -

 

 

(652)

 

 

  Recoveries

 

 

13 

 

 

 -

 

 

 

 

28 

 

 

 -

 

 

 -

 

 

42 

 

 

  Provisions

 

 

51 

 

 

196 

 

 

28 

 

 

336 

 

 

(1)

 

 

(78)

 

 

532 

 

 

Ending Balance - June 30, 2013

 

$

1,690 

 

$

659 

 

$

423 

 

$

1,967 

 

$

32 

 

$

298 

 

$

5,069 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ending June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance - March 31, 2012

 

 

1,643 

 

 

391 

 

 

363 

 

 

1,748 

 

 

39 

 

 

162 

 

 

4,346 

 

 

  Charge-offs

 

 

 -

 

 

 -

 

 

 -

 

 

(35)

 

 

 -

 

 

 -

 

 

(35)

 

 

  Recoveries

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

 

 

  Provisions

 

 

308 

 

 

49 

 

 

45 

 

 

169 

 

 

11 

 

 

(137)

 

 

445 

 

 

Ending Balance - June 30, 2012

 

$

1,951 

 

$

440 

 

$

408 

 

$

1,886 

 

$

50 

 

$

25 

 

$

4,760 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ending June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance - December 31, 2011

 

$

1,264 

 

$

352 

 

$

423 

 

$

1,691 

 

$

40 

 

$

445 

 

$

4,215 

 

 

  Charge-offs

 

 

(3)

 

 

 -

 

 

 -

 

 

(35)

 

 

 -

 

 

 -

 

 

(38)

 

 

  Recoveries

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

 

 

  Provisions

 

 

690 

 

 

88 

 

 

(15)

 

 

222 

 

 

10 

 

 

(420)

 

 

575 

 

 

Ending Balance - June 30, 2012

 

$

1,951 

 

$

440 

 

$

408 

 

$

1,886 

 

$

50 

 

$

25 

 

$

4,760 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

Note 11 – Loans Receivable and Credit Quality (Continued)

 

The following tables represent the allocation for loan losses and the related loan portfolio disaggregated based on impairment methodology at June 30, 2013 and December 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

Commercial Construction

 

Commercial

 

Residential Real Estate

 

Consumer

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

$

1,690 

 

$

659 

 

$

423 

 

$

1,967 

 

$

32 

 

$

298 

 

$

5,069 

Ending balance: individually evaluated for impairment

$

127 

 

$

153 

 

$

12 

 

$

255 

 

$

 -

 

$

 -

 

$

547 

Ending balance: collectively evaluated for impairment

$

1,563 

 

$

506 

 

$

411 

 

$

1,712 

 

$

32 

 

$

298 

 

$

4,522 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

213,588 

 

$

19,987 

 

$

31,715 

 

$

267,388 

 

$

1,145 

 

 

 

 

$

533,823 

Ending balance: individually evaluated  for impairment

$

7,180 

 

$

3,418 

 

$

231 

 

$

1,326 

 

$

 -

 

 

 

 

$

12,155 

Ending balance: collectively evaluated for impairment

$

206,408 

 

$

16,569 

 

$

31,484 

 

$

266,062 

 

$

1,145 

 

 

 

 

$

521,668 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

$

2,007 

 

$

660 

 

$

394 

 

$

1,677 

 

$

33 

 

$

376 

 

$

5,147 

Ending balance: individually evaluated for impairment

$

411 

 

$

198 

 

$

11 

 

$

130 

 

$

 -

 

$

 -

 

$

750 

Ending balance: collectively evaluated for impairment

$

1,596 

 

$

462 

 

$

383 

 

$

1,547 

 

$

33 

 

$

376 

 

$

4,397 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

204,904 

 

$

19,717 

 

$

28,696 

 

$

250,854 

 

$

1,382 

 

 

 

 

$

505,553 

Ending balance: individually evaluated  for impairment

$

7,620 

 

$

3,615 

 

$

302 

 

$

1,118 

 

$

 -

 

 

 

 

$

12,655 

Ending balance: collectively evaluated for impairment

$

197,284 

 

$

16,102 

 

$

28,394 

 

$

249,736 

 

$

1,382 

 

 

 

 

$

492,898 

 

Troubled Debt Restructurings

 

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition than it would not otherwise consider, resulting in a modified loan which is then identified as troubled debt restructuring (“TDR”).  The Company may modify loans through rate reductions, extensions to maturity, interest only payments, or payment modifications to better coincide the timing of payments due under the modified terms with the expected timing of cash flows from the borrowers’ operations.  Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.  TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses.

 

The Company identifies loans for potential restructure primarily through direct communication with the borrower and the evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports.  Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.

19

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 11Loans Receivable and Credit Quality (Continued)

 

The following table presents TDRs outstanding  as of June 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

 

Accrual Loans

 

Non-Accrual Loans

 

Total Modifications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

 

 

Commercial real estate

$

5,042 

 

$

368 

 

$

5,410 

 

 

Commercial construction

 

1,901 

 

 

 -

 

 

1,901 

 

 

Commercial

 

181 

 

 

 -

 

 

181 

 

 

Residential real estate

 

806 

 

 

 -

 

 

806 

 

 

Consumer

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

7,930 

 

$

368 

 

$

8,298 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2013,  no available commitments were outstanding on TDRs.

 

For the three and six months ended June 30, 2013 there were no newly restructured loans.  The following table presents newly restructured loans that occurred during the six months ended June 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Loans

 

Pre-Modification Outstanding Balance

 

Post- Modification Outstanding Balance

 

 

 

 

 

 

 

 

 

 

 

Three Months Ending June 30, 2012

 

(Dollars In Thousands)

 

Commercial real estate

 

 3

 

$

652 

 

$

652 

 

Commercial construction

 

 1

 

 

341 

 

 

341 

 

 

 

 

 

 

 

 

 

 

 

 

 

 4

 

$

993 

 

$

993 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ending June 30, 2012

 

(Dollars In Thousands)

 

Commercial real estate

 

 4

 

$

1,259 

 

$

1,259 

 

Commercial construction

 

 1

 

 

341 

 

 

341 

 

Residential real estate

 

 1

 

 

670 

 

 

670 

 

 

 

 

 

 

 

 

 

 

 

 

 

 6

 

$

2,270 

 

$

2,270 

 

 

 

Of the TDRs described above, five (5) loans required an impairment reserve of $483 thousand recorded in the allowance for loan losses for the six months ended June 30, 2012.    

 

The following table presents loans that were classified as a TDR within the prior twelve months that experienced a payment default (loans ninety days or more past due) during the three and six month periods ended June 30, 2013 and 2012, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Loans

 

 

Recorded Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars In Thousands)

 

 

Three Months Ending June 30, 2013

 

 

 

 

 

 

 

 

Commercial

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

Six Months Ending June 30, 2013

 

 

 

 

 

 

 

 

Commercial

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

20

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 11 – Loans Receivable and Credit Quality (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Loans

 

 

Recorded Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

 

 

Three Months Ending June 30, 2012

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

$

999 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

999 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ending June 30, 2012

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

$

999 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

999 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 12 – Fair Value Measurements 

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

ASC Topic 860 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC Topic 860 are as follows:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. 

21

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 12 – Fair Value Measurements (Continued)

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy utilized at June 30, 2013 and December 31, 2012, respectively, are as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

(Level 1)       Quoted Prices in Active Markets for Identical Assets

 

(Level 2) Significant Other Observable Inputs

 

(Level 3) Significant Unobservable Inputs

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

U.S. Government agency obligations

$

 -

 

$

30,975 

 

$

 -

 

$

30,975 

Municipal Bonds

 

 -

 

 

37,095 

 

 

 -

 

 

37,095 

U.S. Government Sponsored Enterprise (GSE) -

 

 

 

 

 

 

 

 

 

 

 

  Mortgage-backed securities - residential

 

 -

 

 

6,794 

 

 

 -

 

 

6,794 

Corporate bonds

 

 -

 

 

3,281 

 

 

 -

 

 

3,281 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013 Securities available for sale

$

 -

 

$

78,145 

 

$

 -

 

$

78,145 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

$

 -

 

$

40,605 

 

$

 -

 

$

40,605 

Municipal Bonds

 

 -

 

 

38,952 

 

 

 -

 

 

38,952 

U.S. Government Sponsored Enterprise (GSE) -

 

 

 

 

 

 

 

 

 

 

 

  Mortgage-backed securities - residential

 

 -

 

 

9,017 

 

 

 -

 

 

9,017 

Corporate bonds

 

 -

 

 

3,283 

 

 

 -

 

 

3,283 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012 Securities available for sale

$

 -

 

$

91,857 

 

$

 -

 

$

91,857 

 

22

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 12 – Fair Value Measurements (Continued)

 

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2013 and December 31, 2012, respectively, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

(Level 1)       Quoted Prices in Active Markets for Identical Assets

 

(Level 2) Significant Other Observable Inputs

 

(Level 3) Significant Unobservable Inputs

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

 

June 30, 2013 Impaired loans (1)

$

 -

 

$

 -

 

$

2,382 

 

$

2,382 

 

June 30, 2013 Impaired loans (2)

$

 -

 

$

 -

 

$

509 

 

$

509 

 

June 30, 2013 Other real estate owned (1)

$

 -

 

$

 -

 

$

2,639 

 

$

2,639 

 

December 31, 2012 Impaired loans (1)

$

 -

 

$

 -

 

$

2,006 

 

$

2,006 

 

December 31, 2012 Impaired loans (2)

$

 -

 

$

 -

 

$

1,048 

 

$

1,048 

 

December 31, 2012 Other real estate owned (1)

$

 -

 

$

 -

 

$

3,038 

 

$

3,038 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally include various

     Level 3 input which are not identifiable.  Fair values may also include qualitative adjustments by management based on economic

     conditions and liquidation expenses.

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)  Fair Value determined using the debt service of the borrower.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans are those that are accounted for under existing FASB guidance,  in which the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the

properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

 

At June 30, 2013, of the impaired loans having an aggregate balance of $12.2 million, $8.7 million did not require a valuation allowance because the value of the collateral securing the loan was determined to meet or exceed the balance owed on the loan. Of the remaining $3.5 million in impaired loans, an aggregate valuation allowance of $546 thousand was required to reflect what was determined to be a shortfall in the value of the collateral as compared to the balance on such loans.

 

Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are carried at fair value less estimated cost to sell.  Fair value is based upon independent market prices or appraised value of the property.  These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.

23

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 12 – Fair Value Measurements (Continued)

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

Description

Fair Value
Estimate

 

Valuation Techniques

 

Unobservable Input

 

Range
(Weighted Average)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars In Thousands)

 

June 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

2,382 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

0% to -25% (-21.9%)

 

 

 

 

 

 

 

 

Liquidation expenses (3)

 

0 to -8.5% (-7.8%)

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

509 

 

Discounted Cash Flows (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned

$

2,639 

 

Listings, Letters of Intent & Third Party Evaluations (4)

 

Liquidation expenses (3)

 

-5% (-5%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various

 

 

Level 3 inputs which are not identifiable. 

 

(2)

Appraisals may be adjusted by management for qualitative factors including economic conditions and the age of the appraisal. 

 

 

The range and weighted average of appraisal adjustments are presented as a percent of the appraisal.

 

(3)

Appraisals and pending agreements of sale are adjusted by management for liquidation expenses.  The range and weighted average of

 

 

liquidation expense adjustments are presented as a percent of the appraisal or pending agreement of sale.

 

(4)

Fair value is determined by listings, letters of intent or third-party evaluations.

 

(5)

Fair value is determined using the debt service of the borrower.

 

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at June 30, 2013 and December 31, 2012:

 

Cash and Cash Equivalents (Carried at Cost)

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

Interest Bearing Time Deposits (Carried at Cost)

Fair values for fixed-rate time certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. The Company generally purchases amounts below the insured limit, limiting the amount of credit risk on these time deposits.

Securities Available for Sale (Carried at Fair Value)

The fair value of securities available for sale are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted prices. For these securities, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.

24

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 12 – Fair Value Measurements (Continued)

Loans Receivable (Carried at Cost)

The fair values of loans, excluding impaired loans carried at fair value of collateral, are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, and projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Restricted Investment in Bank Stock (Carried at Cost)

The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit Liabilities (Carried at Cost)

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Securities Sold Under Agreements to Repurchase and Federal Funds Purchased (Carried at Cost)

These borrowings are short term and the carrying amount approximates the fair value.

Long-Term Borrowings (Carried at Cost)

Fair values of FHLB and Univest advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB and Univest advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-Balance Sheet Financial Instruments (Disclosed at Cost)

 

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.

25

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 12 – Fair Value Measurements (Continued)

The estimated fair values of the Company’s financial instruments were as follows at June 30, 2013 and December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Amount

 

 

Fair Value Estimate

 

 

(Level 1) Quoted Prices in Active Markets for Identical Assets

 

 

(Level 2) Significant Other Observable Inputs

 

 

(Level 3) Significant Unobservable Inputs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

 

 

June 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

18,247 

 

$

18,247 

 

$

18,247 

 

$

 -

 

$

 -

 

 

 

Interest bearing time deposits

 

4,141 

 

 

4,157 

 

 

 -

 

 

4,157 

 

 

 -

 

 

 

Securities available-for-sale

 

78,145 

 

 

78,145 

 

 

 -

 

 

78,145 

 

 

 -

 

 

 

Loans receivable, net of allowance

 

528,333 

 

 

535,158 

 

 

 -

 

 

 -

 

 

535,158 

 

 

 

Restricted investments in bank stock

 

1,885 

 

 

1,885 

 

 

 -

 

 

1,885 

 

 

 -

 

 

 

Accrued interest receivable

 

1,639 

 

 

1,639 

 

 

 -

 

 

1,639 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

544,751 

 

 

545,226 

 

 

488,408 

 

 

56,818 

 

 

 -

 

 

 

Securities sold under agreements to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  repurchase and federal funds purchased

 

30,699 

 

 

30,697 

 

 

30,697 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

7,750 

 

 

7,750 

 

 

 -

 

 

 -

 

 

7,750 

 

 

 

Long-term borrowings

 

7,352 

 

 

7,350 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued interest payable

 

266 

 

 

266 

 

 

 -

 

 

266 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to grant loans

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

Unfunded commitments under lines of credit

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

Standby letters of credit

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

29,940 

 

$

29,940 

 

$

29,940 

 

$

 -

 

$

 -

 

 

 

Interest bearing time deposits

 

5,945 

 

 

5,977 

 

 

 -

 

 

5,977 

 

 

 -

 

 

 

Securities available-for-sale

 

91,857 

 

 

91,857 

 

 

 -

 

 

91,857 

 

 

 -

 

 

 

Loans receivable, net of allowance

 

500,072 

 

 

508,053 

 

 

 -

 

 

 -

 

 

508,053 

 

 

 

Restricted investments in bank stock

 

1,454 

 

 

1,454 

 

 

 -

 

 

1,454 

 

 

 -

 

 

 

Accrued interest receivable

 

1,578 

 

 

1,578 

 

 

 -

 

 

1,578 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

553,020 

 

 

553,756 

 

 

 -

 

 

553,756 

 

 

 -

 

 

 

Securities sold under agreements to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  repurchase and federal funds purchased

 

24,452 

 

 

24,452 

 

 

 -

 

 

24,452 

 

 

 -

 

 

 

Long-term borrowings

 

12,586 

 

 

12,708 

 

 

 -

 

 

 -

 

 

12,708 

 

 

 

Accrued interest payable

 

327 

 

 

327 

 

 

 -

 

 

327 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to grant loans

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

Unfunded commitments under lines of credit

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

Standby letters of credit

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

27

 


 

 

 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

Note 13 – Offsetting Assets and Liabilities

 

Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)

The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities.  Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets.  As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities.  The obligation to repurchase the securities is reflected as a liability in the Company's consolidated statements of condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Company does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

 

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Company be in default (e.g., fails to make an interest payment to the counterparty). For private institution repurchase agreements, if the private institution counterparty were to default (e.g., declare bankruptcy), the Company could cancel the repurchase agreement (i.e., cease payment of principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The collateral is held by a third party financial institution in the counterparty's custodial account. The counterparty has the right to sell or repledge the investment securities. For government entity repurchase agreements, the collateral is held by the Company in a segregated custodial account under a tri-party agreement.

 

The following table presents the liabilities subject to an enforceable master netting arrangement or repurchase agreements as of June 30, 2013 and December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross Amounts

 

 

of Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts of

 

 

Offset in the

 

 

Presented in the

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognized

 

 

Consolidated

 

 

Consolidated

 

 

Financial

 

 

Cash Collateral

 

 

 

 

 

 

 

 

 

Liabilities

 

 

Balance Sheet

 

 

Balance Sheet

 

 

Instruments

 

 

Pledged

 

 

Net Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

 

 

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase Agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private Institutions

$

30,699 

 

$

 -

 

$

30,699 

 

$

(30,699)

 

$

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase Agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private Institutions

$

24,452 

 

$

 -

 

$

24,452 

 

$

(24,452)

 

$

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2013 and December 31, 2012, the fair value of securities pledged was $40.2 million and $45.8 million, respectively.

 

 

Note 14 – New Accounting Standards

 

Accounting Standards Update (ASU) No. 2011-11, “Balance Sheet (Topic 210)—Disclosures about Offsetting Assets and Liabilities, and ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet”, to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and did not have a material impact on the Company’s financial statements. See Note 13 – Offsetting Assets and Liabilities.

 

Accounting Standards Update (ASU) No. 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.”  ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income.  ASU 2013-02 became effective for the Company on January 1, 2013 and did not have a material impact on the Company’s financial statements.  See Note 5 - Other Comprehensive Income.

 

28

 


 

 

 Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This discussion and analysis provides an overview of the financial condition and results of operations of Embassy Bancorp, Inc. (the “Company”) as of June 30, 2013 and for the three and six months ending June 30, 2013 and 2012, respectively. This discussion should be read in conjunction with the preceding consolidated financial statements and related footnotes, as well as with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2012, included in the Company’s Form 10-K filed with the Securities and Exchange Commission. Current performance does not guarantee and may not be indicative of similar performance in the future.

 

Critical Accounting Policies

 

Disclosure of the Company’s significant accounting policies is included in Note 1 to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2012. Some of these policies are particularly sensitive, requiring significant judgments, estimates and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses and the valuation of deferred tax assets. Additional information is contained in this Form 10-Q under the paragraphs titled “Provision for Loan Losses,” “Credit Risk and Loan Quality,” and “Income Taxes” contained on the following pages.

 

Forward-looking Statements

 

This report contains forward-looking statements, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.  These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors and other conditions that, by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty.

 

Such forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “intends”, “will”, “should”, “anticipates”, or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy.

 

No assurance can be given that the future results covered by forward-looking statements will be achieved. Such statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could impact the Company’s operating results include, but are not limited to, (i) the effects of changing economic conditions in the Company’s market areas and nationally, (ii) credit risks of commercial, real estate, consumer and other lending activities, (iii) significant changes in interest rates, (iv) changes in federal and state banking laws and regulations which could impact the Company’s operations, and (iv) other external developments which could materially affect the Company’s business and operations.

 

OVERVIEW

 

The Company is a Pennsylvania corporation organized in 2008 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act). The Company was formed for purposes of acquiring Embassy Bank For The Lehigh Valley (the “Bank”) in connection with the reorganization of the Bank into a bank holding company structure, which was consummated on November 11, 2008. Accordingly, the Company owns all of the capital stock of the Bank, giving the organization more flexibility in meeting its capital needs as the Company continues to grow. Embassy Holdings, LLC (the “LLC”) is a wholly-owned subsidiary of the Bank organized to engage in the holding of property acquired by the Bank in satisfaction of debts previously contracted.  As such, the consolidated financial statements contained herein include the accounts of the Company, the Bank and the LLC.

 

The Bank, which is the Company’s primary operating subsidiary, was originally incorporated as a Pennsylvania bank on May 11, 2001 and opened its doors on November 6, 2001. It was formed by a group of local business persons and professionals with significant prior experience in community banking in the Lehigh Valley area of Pennsylvania, the Bank’s primary market area.

 

The Company’s assets increased  $1.9 million from $643.0 million at December 31, 2012 to $644.9 million at June 30, 2013 due primarily to an increase in loans receivable, offset by a decrease in cash and cash equivalents.

 

Net income for the three months ended June 30, 2013 was $1.3 million compared to a net income for the three months ended June 30, 2012 of $1.2 million. Net income for the six months ended June 30, 2013 was $2.4 million compared to a net income for the six months ended June 30, 2012 of $2.4 million. Loans receivable, net of the allowance for loan losses, increased $28.2 million to $528.3 million at June 30, 2013 from $500.1 million at December 31, 2012. The market is very competitive and the Company is committed to

29

 


 

 

maintaining a high quality portfolio that returns a reasonable market rate. The Company expects to increase lending activity, as the Company expands its presence in its market and becomes more widely known.  The past and current economic conditions have created lower demand for loans by credit-worthy customers.  The lending staff has been active in contacting new prospects and promoting the Company’s name in the community. Management believes that this will translate into continued growth of a portfolio of quality loans and core deposit relationships, although there can be no assurance of this.

 

RESULTS OF OPERATIONS

 

Net Interest Income

 

Total interest income for the three months ended June 30, 2013 and 2012 totaled $6.1 million.  Average earning assets were $617.5 million for the three months ended June 30, 2013 compared to $600.7 million for the three months ended June 30, 2012. The tax equivalent yield on average earning assets was 4.06% for the second quarter of 2013 compared to 4.23% for the second quarter of 2012.

 

Total interest expense for the three months ended June 30, 2013 decreased $314.0 thousand to $742 thousand as compared to $1.1 million for the three months ended June 30, 2012, primarily due to decreases in deposit rates offset by an increase in average deposits. Average interest bearing liabilities were $534.1 million for the three months ended June 30, 2013 compared to $528.6 million for the three months ended June 30, 2012.  The yield on average interest bearing liabilities was 0.56% for the second quarter of 2013 compared to 0.80% for the second quarter of 2012. This decrease was the result of market conditions, deposit mix, competition, and management’s resulting adjustments to the interest rates provided to depositors.

 

Net interest income for the three months ended June 30, 2013 was $5.4 million compared to $5.0 million for the three months ended June 30, 2012. The improvement in net interest income for the three months ended June 30, 2013 is a result of decreases in the interest expense associated with deposits and other borrowed funds and growth in interest earning assets, offset by a reduction in rates received on a higher level of interest earning assets. The Company’s net interest margin for the three months ended June 30, 2013 increased eight (8) basis points to 3.60% as compared to 3.52% for the three months ended June 30, 2012, due to the current interest rate environment, including decreased cost of deposits offset by decreased interest rates on the investment securities portfolio and the competitive interest rate pressure of lending.

 

Total interest income for the six months ended June 30, 2013 and 2012 totaled $12.1 million.  Average earning assets were $616.5 million for the six months ended June 30, 2013 compared to $592.4 million for the six months ended June 30, 2012. The tax equivalent yield on average earning assets was 4.08% for the second quarter of 2013 compared to 4.24% for the second quarter of 2012.

 

Total interest expense for the six months ended June 30, 2013 decreased $728.0 thousand to $1.5 million as compared to $2.3 million for the six months ended June 30, 2012, primarily due to decreases in deposit rates offset by an increase in average deposits. Average interest bearing liabilities were $534.6 million for the six months ended June 30, 2013 compared to $522.0 million for the six months ended June 30, 2012.  The yield on average interest bearing liabilities was 0.58% for the six months ended June 30, 2013 compared to 0.87% for the six months ended June 30, 2012. This decrease was the result of market conditions, deposit mix, competition, and management’s resulting adjustments to the interest rates provided to depositors.

 

Net interest income for the six months ended June 30, 2013 was $10.6 million compared to $9.8 million for the six months ended June 30, 2012. The improvement in net interest income for the six months ended June 30, 2013 is a result of decreases in the interest expense associated with deposits and other borrowed funds and growth in interest earning assets, offset by a reduction in rates received on a higher level of interest earning assets. The Company’s net interest margin for the six months ended June 30, 2013 increased ten  (10)  basis points to 3.58% as compared to 3.48% for the six months ended June 30, 2012, due to the current interest rate environment, including decreased cost of deposits offset by decreased interest rates on the investment securities portfolio and the competitive interest rate pressure of lending.

30

 


 

 

 

Below are tables which set forth average balances and corresponding yields for the corresponding three month periods ended June 30, 2013 and June 30, 2012, respectively:

 

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (quarter to date)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax

 

 

 

 

 

Tax

 

 

Average

 

 

 

Equivalent

 

Average

 

 

 

Equivalent

 

 

Balance

 

Interest

 

Yield

 

Balance

 

Interest

 

Yield

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars In Thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Loans - taxable

$      521,252

 

$     5,558

 

4.28%

 

$       444,579

 

$     5,361

 

4.85%

 

Loans - non-taxable

3,648 

 

35 

 

5.97%

 

3,882 

 

38 

 

5.97%

 

Investment securities - taxable

50,928 

 

211 

 

1.66%

 

61,412 

 

312 

 

2.04%

 

Investment securities - non-taxable

34,196 

 

289 

 

5.14%

 

39,192 

 

343 

 

5.35%

 

Federal funds sold

568 

 

-

 

0.19%

 

866 

 

 -

 

0.00%

 

Time deposits

4,136 

 

 

0.89%

 

7,711 

 

26 

 

1.36%

 

Interest bearing deposits with banks

2,799 

 

 

0.14%

 

43,074 

 

25 

 

0.23%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL INTEREST EARNING ASSETS

617,527 

 

6,103 

 

4.06%

 

600,716 

 

6,105 

 

4.23%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less allowance for loan losses

(5,021)

 

 

 

 

 

(4,438)

 

 

 

 

 

Other assets

27,483 

 

 

 

 

 

23,870 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

$      639,989

 

 

 

 

 

$       620,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand deposits,

 

 

 

 

 

 

 

 

 

 

 

 

NOW and money market

$        56,268

 

$            7

 

0.05%

 

$         55,097

 

$          19

 

0.14%

 

Savings

379,468 

 

440 

 

0.47%

 

366,318 

 

639 

 

0.70%

 

Certificates of deposit

56,736 

 

142 

 

1.01%

 

65,466 

 

207 

 

1.27%

 

Securities sold under agreements to

 

 

 

 

 

 

 

 

 

 

 

 

repurchase, federal funds purchased and

 

 

 

 

 

 

 

 

 

 

 

 

short & long-term borrowings

41,628 

 

153 

 

1.47%

 

41,715 

 

191 

 

1.84%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL INTEREST BEARING LIABILITIES

534,100 

 

742 

 

0.56%

 

528,596 

 

1,056 

 

0.80%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing demand deposits

48,415 

 

 

 

 

 

39,224 

 

 

 

 

 

Other liabilities

3,800 

 

 

 

 

 

3,817 

 

 

 

 

 

Stockholders' equity

53,674 

 

 

 

 

 

48,511 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

$      639,989

 

 

 

 

 

$       620,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

$     5,361

 

 

 

 

 

$     5,049

 

 

 

Net interest spread

 

 

 

 

3.50%

 

 

 

 

 

3.43%

 

Net interest margin

 

 

 

 

3.60%

 

 

 

 

 

3.52%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31

 


 

 

 

Below are tables which set forth average balances and corresponding yields for the corresponding six month periods ending June 30, 2013 and June 30, 2012, respectively:

 

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (year to date)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax

 

 

 

 

 

Tax

 

 

Average

 

 

 

Equivalent

 

Average

 

 

 

Equivalent

 

 

Balance

 

Interest

 

Yield

 

Balance

 

Interest

 

Yield

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars In Thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Loans - taxable

$          514,473

 

$       11,008

 

4.33%

 

$          435,440

 

$     10,632

 

4.91%

 

Loans - non-taxable

3,660 

 

71 

 

5.91%

 

3,825 

 

74 

 

5.81%

 

Investment securities - taxable

53,892 

 

433 

 

1.62%

 

60,979 

 

640 

 

2.11%

 

Investment securities - non-taxable

34,328 

 

578 

 

5.12%

 

37,114 

 

656 

 

5.33%

 

Federal funds sold

717 

 

 

0.20%

 

1,716 

 

 

0.23%

 

Time deposits

4,607 

 

23 

 

1.01%

 

7,706 

 

53 

 

1.38%

 

Interest bearing deposits with banks

4,855 

 

 

0.21%

 

45,641 

 

51 

 

0.22%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL INTEREST EARNING ASSETS

616,532 

 

12,119 

 

4.08%

 

592,421 

 

12,108 

 

4.24%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less allowance for loan losses

(5,046)

 

 

 

 

 

(4,353)

 

 

 

 

 

Other assets

26,841 

 

 

 

 

 

23,284 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

$          638,327

 

 

 

 

 

$          611,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand deposits,

 

 

 

 

 

 

 

 

 

 

 

 

NOW and money market

$            57,462

 

$              17

 

0.05%

 

$            53,247

 

$            42

 

0.16%

 

Savings

379,190 

 

902 

 

0.48%

 

357,793 

 

1,378 

 

0.77%

 

Certificates of deposit

57,403 

 

294 

 

1.03%

 

67,909 

 

448 

 

1.33%

 

Securities sold under agreements to

 

 

 

 

 

 

 

 

 

 

 

 

repurchase, federal funds purchased and

 

 

 

 

 

 

 

 

 

 

 

 

short & long-term borrowings

40,509 

 

322 

 

1.61%

 

43,099 

 

395 

 

1.84%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL INTEREST BEARING LIABILITIES

534,564 

 

1,535 

 

0.58%

 

522,048 

 

2,263 

 

0.87%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing demand deposits

47,578 

 

 

 

 

 

38,222 

 

 

 

 

 

Other liabilities

3,654 

 

 

 

 

 

3,756 

 

 

 

 

 

Stockholders' equity

52,531 

 

 

 

 

 

47,326 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

$          638,327

 

 

 

 

 

$          611,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

$       10,584

 

 

 

 

 

$       9,845

 

 

 

Net interest spread

 

 

 

 

3.50%

 

 

 

 

 

3.37%

 

Net interest margin

 

 

 

 

3.58%

 

 

 

 

 

3.48%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 


 

 

 

Provision for Loan Losses

 

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is maintained at a level considered by management to be adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change.

 

The allowance consists of general, specific, qualitative and unallocated components. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.  The specific component relates to loans that are classified as watch, other assets especially mentioned, substandard, doubtful or loss. For such loans they may also be classified as impaired or restructured.  For loans that are further classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. 

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and home equity loans for impairment disclosures, unless such loans are the subject of a restructuring agreement or there is a possible loss expected.

 

For the three months ended June 30, 2013, the provision for loan losses was $252 thousand, as compared to $445 thousand, for the same period ended June 30, 2012.  In the three months ended June 30, 2013, there were charge-offs in the amount of $195 thousand; however principal in the amount of $1 thousand was recovered.  For the six months ended June 30, 2013, the provision for loan losses was $532 thousand, as compared to $575 thousand, for the same period ended June 30, 2012.  In the six months ended June 30, 2013, there were charge-offs in the amount of $652 thousand, however principal in the amount of $42 thousand was recovered.  The allowance for loan losses is $5.1 million as of June 30, 2013, which is 0.95% of outstanding loans, compared to $4.8 million or 1.03% of outstanding loans as of June 30, 2012. At December 31, 2012, the allowance for loan losses of $5.1 million represented 1.00% of total outstanding loans. Based principally on economic conditions, asset quality, and loan-loss experience, including that of comparable institutions in the Bank’s market area, the allowance is believed to be adequate to absorb any losses inherent in the portfolio. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate, or that material increases will not be necessary should the quality of the loans deteriorate.  The Bank has not participated in any sub-prime lending activity.

 

 

 

 

 

 

 

 

 

 

 

 

 

33

 


 

 

 

 

 

The activity in the allowance for loan losses is shown in the following table, as well as period end loans receivable and the allowance for loan losses as a percent of the total loan portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

Loans receivable at end of period

$

533,823 

 

$

462,408 

 

$

533,823 

 

$

462,408 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

$

5,011 

 

$

4,346 

 

$

5,147 

 

$

4,215 

  Provision for loan losses

 

252 

 

 

445 

 

 

532 

 

 

575 

  Loans charged off:

 

 

 

 

 

 

 

 

 

 

 

     Commercial real estate

 

(121)

 

 

 -

 

 

(381)

 

 

(3)

     Commercial construction

 

 -

 

 

 -

 

 

(197)

 

 

 -

     Residential real estate

 

(74)

 

 

(35)

 

 

(74)

 

 

(35)

  Total loans charged off

 

(195)

 

 

(35)

 

 

(652)

 

 

(38)

  Recoveries of loans previously charged off:

 

 

 

 

 

 

 

 

 

 

 

     Commercial real estate

 

 -

 

 

 -

 

 

13 

 

 

 -

     Commercial

 

 

 

 -

 

 

 

 

 -

     Residential real estate

 

 -

 

 

 

 

28 

 

 

  Total recoveries

 

 

 

 

 

42 

 

 

  Net (charge offs) recoveries

 

(194)

 

 

(31)

 

 

(610)

 

 

(30)

Balance at end of period

$

5,069 

 

$

4,760 

 

$

5,069 

 

$

4,760 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses to loans

 

 

 

 

 

 

 

 

 

 

 

  receivable at end of period

 

0.95% 

 

 

1.03% 

 

 

0.95% 

 

 

1.03% 

 

 

34

 


 

 

Non-interest Income

 

Total non-interest income was $482 thousand for the three months ended June 30, 2013 compared to $393 thousand for the same period in 2012, and $979 thousand for the six months ended June 30, 2013 compared to $676 thousand for the same period in 2012.  The increase is primarily due to the growth in the Bank’s credit card and merchant processing customer base, increase in income associated with bank owned life insurance and the profit on the sale of other real estate owned, offset by other real estate owned net impairment charges.

 

Non-interest Expense

 

Non-interest expenses increased $457.0 thousand, or 13.5%, from $3.4 million for the three months ended June 30, 2012 to $3.8 million for the same period ended June 30, 2013. The increase is due to: an increase of $289 thousand in salary and employee benefits, the majority of which are in conjunction with increased non-qualified pension expense, insurance benefits and salary adjustments; an increase of $54 thousand in data processing expense related to the enhancement of network systems; an increase of $28 thousand in occupancy and equipment; an increase of $73 thousand in credit card processing expense due to an increase in volume; an increase of $11 thousand in FDIC insurance expense; an increase of $3 thousand in other real estate owned expenses; and an increase of $21 thousand in other operating expenses due primarily to the change in valuation of officer’s life insurance; offset by a decrease of $13 thousand in professional fees due to greater compliance costs to implement XBRL reporting in 2012; and a decrease of $13 thousand in loan and real estate expenses. 

 

Non-interest expenses increased $930.0 thousand, or 13.8%, from $6.7 million for the six months ended June 30, 2013 to $7.7 million for the same period ended June 30, 2013. The increase is due to: an increase of $533 thousand in salary and employee benefits, the majority of which are in conjunction with increased non-qualified pension expense, insurance benefits and salary adjustments; an increase of $92 thousand in data processing expense related to the enhancement of network systems; an increase of $17 thousand in occupancy and equipment; an increase of $109 thousand in credit card processing expense due to an increase in volume; an increase of $28 thousand in FDIC insurance expense; an increase of $3 thousand in other insurance expense; an increase of $27 thousand in charitable contributions; and an increase of $100 thousand in other operating expenses due primarily to the change in valuation of officer’s life insurance; offset by a decrease of $12 thousand in loan and real estate expenses.  

 

A breakdown of other expenses can be found in the statements of income.

 

Income Taxes

 

The allocated provision for income taxes for the three months ended June 30, 2013 totaled $492 thousand, or 28.0% of income before taxes. The provision for income taxes for the three months ended June 30, 2012 totaled $438 thousand, or 27.1% of income before taxes.  The allocated provision for income taxes for the six months ended June 30, 2013 totaled $929 thousand, or 27.6% of income before taxes. The provision for income taxes for the six months ended June 30, 2012 totaled $865 thousand, or 26.9% of income before taxes.    The slight increase in the tax rate is a result of the change in the mix of taxable and tax free loans and investments. 

 

 

 

35

 


 

 

FINANCIAL CONDITION

 

Securities

 

The Bank’s securities portfolio continues to be classified, in its entirety, as “available for sale.” Management believes that a portfolio classification of available for sale allows complete flexibility in the investment portfolio. Using this classification, the Bank intends to hold these securities for an indefinite amount of time, but not necessarily to maturity. Such securities are carried at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity. The portfolio is structured to provide maximum return on investments while providing a consistent source of liquidity and meeting strict risk standards. Investment securities consist primarily of U.S. government agency securities, mortgage-backed securities issued by FHLMC or FNMA, corporate bonds, and taxable and non-taxable municipal bonds. The Bank holds no high-risk securities or derivatives as of June 30, 2013. The Bank has not made any investments in non-U.S. government agency mortgage backed securities or sub-prime loans.

 

Total securities at June 30, 2013 were $78.1 million compared to $91.9 million at December 31, 2012. The decrease in the investment portfolio is the result of principal payments on U.S. GSEs and the maturity of U.S. agency bonds.  The carrying value of the securities portfolio as of June 30, 2013 includes a net unrealized gain of $934 thousand, which is recorded as accumulated other comprehensive income in stockholders’ equity net of income tax effect. This compares to a net unrealized gain of $3.5 million at December 31, 2012. The current unrealized gain position of the securities portfolio is due to the changes in market rates since purchase. No securities are deemed to be other than temporarily impaired.

 

Loans

 

The loan portfolio comprises a major component of the Bank’s earning assets. All of the Bank’s loans are to domestic borrowers. Total net loans at June 30, 2013 increased $28.2 million to $528.3 million from $500.1 million at December 31, 2012. The loan to deposit ratio increased from 91% at December 31, 2012 to 98% at June 30, 2013. The Bank’s loan portfolio at June 30, 2013 was comprised of residential real estate and consumer loans of $268.5 million, an increase of $16.3 million from December 31, 2012, and commercial loans of $265.3 million, an increase of $12.0 million from December 31, 2012.  The Bank has not originated, nor does it intend to originate, sub-prime mortgage loans.

 

Credit Risk and Loan Quality

 

The allowance for loan losses decreased $78 thousand totaling  $5.1 million at June 30, 2013 and December 31, 2012. At June 30, 2013 and December 31, 2012, the allowance for loan losses represented 0.95% and 1.00%, respectively of total loans. Based upon current economic conditions, the composition of the loan portfolio, the perceived credit risk in the portfolio and loan-loss experience of comparable institutions in the Bank’s market area, management feels the allowance is adequate to absorb reasonably anticipated losses.

 

At June 30, 2013, aggregate balances on non-performing loans equaled $10.0 million compared to $10.6 million at December 31, 2012 and $11.7 million at June 30, 2012, representing 1.92%, 2.11% and 2.53% of total loans at June 30, 2013,  December 31, 2012 and June 30, 2012, respectively. Troubled debt restructurings, included in the following table, represent loans where the Company, for economic or legal reasons related to the debtor’s financial difficulties, has granted a concession to the debtor that it would not otherwise consider.  There was one loan totaling $3 thousand that was modified and classified as a TDR within the prior twelve months that experienced a payment default (loans ninety or more days past due) for the period ended June 30, 2013.  The Company has one foreclosed asset in the amount of $2.7 million as of June 30, 2013, as compared to three foreclosed assets at December 31, 2012 in the amount of $3.0 million.  The net change is a result of the sale of two assets with a deferred gain totaling $109 thousand, along with a write down totaling $86 thousand on the remaining foreclosed asset.

36

 


 

 

 

The details for non-performing loans are included in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

December 31,

 

 

 

June 30,

 

 

 

 

2013

 

 

 

2012

 

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

 

Non-accrual - commercial

$

1,786 

 

 

$

2,143 

 

 

$

2,449 

 

 

Non-accrual - consumer

 

281 

 

 

 

301 

 

 

 

47 

 

 

Restructured loans (still accruing interest and less
than 90 days past due)

 

6,626 

 

 

 

7,841 

 

 

 

8,833 

 

 

Loans past due 90 or more days, accruing interest

 

1,524 

 

 

 

361 

 

 

 

351 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total nonperforming loans

 

10,217 

 

 

 

10,646 

 

 

 

11,680 

 

 

Foreclosed assets

 

2,639 

 

 

 

3,038 

 

 

 

2,969 

 

 

Total nonperforming assets

$

12,856 

 

 

$

13,684 

 

 

$

14,649 

 

 

Nonperforming loans to total loans at period-end

 

1.92 

%

 

 

2.11 

%

 

 

2.53 

%

 

Nonperforming assets to total assets

 

1.99 

%

 

 

2.13 

%

 

 

2.36 

%

 

 

Premises and Equipment

 

Company premises and equipment, net of accumulated depreciation, decreased $168.0 thousand from December 31, 2012 to June 30, 2013. This decrease is due primarily to depreciation on existing premises and equipment, offset by increases related to purchases.

 

Deposits

 

Total deposits at June 30, 2013 decreased $8.2 million to $544.8 million from $553.0 million at December 31, 2012. Savings deposits increased by $328 thousand, time deposits decreased $2.3 million, and demand deposits decreased by $5.5 million, which the Company attributes primarily to one account resulting in the withdraw of a short-term deposit totaling $11 million, which was offset primarily by $2.8 million in growth in deposits overall.

 

Liquidity

 

Liquidity represents the Company’s ability to meet the demands required for the funding of loans and to meet depositors’ requirements for use of their funds. The Company’s sources of liquidity are cash balances, due from banks, and federal funds sold. Cash and cash equivalents were $18.2 million at June 30, 2013, compared to $29.9 million at December 31, 2012.

 

Additional asset liquidity sources include principal and interest payments from the investment security and loan portfolios. Long-term liquidity needs may be met by selling unpledged securities available for sale, selling loans or raising additional capital. At June 30, 2013, the Company had $78.1 million of available for sale securities. Securities with carrying values of approximately $40.2 million and $45.8 million at June 30, 2013 and December 31, 2012, respectively, were pledged as collateral to secure securities sold under agreements to repurchase, public deposits, and for other purposes required or permitted by law.

 

The Bank also has borrowing capacity with the FHLB of approximately $256.4 million, of which $3.1 million was outstanding in long-term loans at June 30, 2013 and $7.9 million outstanding as of December 31, 2012.  This borrowing capacity with the FHLB includes a line of credit for $25.0 million, of which there is no balance outstanding as of June 30, 2013The long-term loan matures in August of 2013.  There were $7.8 million of short-term advances outstanding at June 30, 2013 and none outstanding as of December 31, 2012. All FHLB borrowings are secured by qualifying assets of the Bank.

 

The Bank also has a line of credit with ACBB of approximately $6.0 million, of which none was outstanding at June 30, 2013.   Advances from this line are unsecured.

 

The Company has two lines of credit totaling an aggregate of $10 million with Univest, of which an aggregate of $4.3 million was outstanding at June 30, 2013. These lines of credit are secured by 833,333 shares of Bank common stock.

 

The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or capital resources.

37

 


 

 

 

Off-Balance Sheet Arrangements

 

The Company’s consolidated financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk. These off-balance sheet arrangements consist of unfunded loans and commitments, as well as lines of credit made under the same standards as on-balance sheet instruments. These unused commitments totaled $90.3 million at June 30, 2013. The Company also has letters of credit outstanding of $5.0 million at June 30, 2013. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Company. Management is of the opinion that the Company’s liquidity is sufficient to meet its anticipated needs.

 

Capital Resources and Adequacy

 

Total stockholders’ equity was $50.5 million as of June 30, 2013, representing a net increase of $505 thousand from December 31, 2012.  The increase in capital was primarily the result of the net income of $2.4 million.

 

The Company and the Bank are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on the consolidated financial statements.

The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and Tier I capital to average assets (as defined). As of June 30, 2013, the Bank met the minimum requirements. In addition, the Bank’s capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the regulations.

The following table provides a comparison of the Bank’s risk-based capital ratios and leverage ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I, common stockholders' equity

$

53,825 

 

 

$

52,046 

 

 

 

Tier II, allowable portion of allowance for loan losses

 

5,069 

 

 

 

5,147 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital

$

58,894 

 

 

$

57,193 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I risk based capital ratio

 

11.73 

%

 

 

12.1 

%

 

 

 

 

 

 

 

 

 

 

 

 

Total risk based capital ratio

 

12.84 

%

 

 

13.3 

%

 

 

 

 

 

 

 

 

 

 

 

 

Tier I leverage ratio

 

8.44 

%

 

 

8.0 

%

 

 

 

 

 

 

 

 

 

 

 

Note: Unrealized gains on securities available for sale are excluded from regulatory capital components of risk-based                                         capital and leverage ratios.

 

The Federal banking regulators have adopted risk-based capital guidelines for bank holding companies. Currently, the required minimum ratio of total capital to risk-weighted assets (including off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be Tier I capital, consisting principally of common shareholders’ equity, non-cumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill. The remainder (Tier II capital) may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock and a limited amount of the general loan loss allowance.

 

In addition to the risk-based capital guidelines, the federal banking regulators established minimum leverage ratio (Tier I capital to total assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 4%.

 

38

 


 

 

 

The following table provides the Company’s risk-based capital ratios and leverage ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I, common stockholders' equity

$

49,916 

 

 

$

47,745 

 

 

 

Tier II, allowable portion of allowance for loan losses

 

5,069 

 

 

 

5,147 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital

$

54,985 

 

 

$

52,892 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I risk based capital ratio

 

10.88 

%

 

 

11.1 

%

 

 

 

 

 

 

 

 

 

 

 

 

Total risk based capital ratio

 

11.99 

%

 

 

12.3 

%

 

 

 

 

 

 

 

 

 

 

 

 

Tier I leverage ratio

 

7.80 

%

 

 

7.3 

%

 

 

 

 

 

 

 

 

 

 

 

 

In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and assigns a higher risk weighted (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. Additional constrains will also be imposed on the inclusion in regulatory capital of mortgage-servicing assets, defined tax assets and minority interest. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for the Bank and the Company on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

39

 


 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable.

 

Item 4 – Controls and Procedures

 

The term “disclosure controls and procedures” is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2013, and they have concluded that, as of this date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.

 

There were no significant changes to our internal controls over financial reporting or in the other factors that could significantly affect our internal controls over financial reporting during the quarter ended June 30, 2013, including any corrective actions with regard to significant deficiencies and material weakness.

40

 


 

 

Part II - Other Information

 

Item 1 - Legal Proceedings

 

The Company and the Bank are an occasional party to legal actions arising in the ordinary course of its business. In the opinion of management, the Company has adequate legal defenses and/or insurance coverage respecting any and each of these actions and does not believe that they will materially affect the Company’s operations or financial position.

 

Item 1A - Risk Factors

 

Not Applicable

 

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

 

Not Applicable

 

Item 3 - Defaults Upon Senior Securities

 

Not Applicable.

 

Item 4 – Mine Safety Disclosures

 

Not Applicable

 

Item 5 - Other Information

 

Not Applicable.

 

Item 6 - Exhibits

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit

 

 

 

 

Number

 

Description

 

 

3.1

 

Articles of Incorporation as amended (conformed) (Incorporated by reference to Exhibit 3.1 of

 

 

 

 

Registrant’s Form 10-Q filed on May 14, 2010).

 

 

3.2

 

By-Laws (Incorporated by reference to Exhibit 2 of Registrant’s Form 8-A filed on December 11, 2008).

 

 

11.1

 

The statement regarding computation of per share earnings required by this exhibit is contained in Note 5

 

 

 

 

to the financial statements under the caption “Basic and Diluted Earnings Per Share.”

 

 

31.1

 

Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).

 

 

31.2

 

Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).

 

 

32

 

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 1350

 

 

 

 

of the Sarbanes-Oxley Act of 2002.

 

 

The following Exhibits are being furnished* as part of this report:

 

No.

Description

101.INS

XBRL Instance Document.*

101.SCH

XBRL Taxonomy Extension Schema Document.*

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.*

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.*

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.*

101.DEF

XBRL Taxonomy Extension Definitions Linkbase Document.*

______________________

* These interactive data files are being furnished as part of this Quarterly Report, and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.   

41

 


 

 

SIGNATURES

 In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

EMBASSY BANCORP, INC.

 

 

 

(Registrant)

 

 

 

 

 

 

By:

/s/ David M. Lobach, Jr.                                                                               

 

Dated: August 13, 2013

 

      David M. Lobach, Jr.

 

 

 

      President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

Dated: August 13, 2013

By:

/s/ Judith A. Hunsicker                                                                     

 

 

 

      Judith A. Hunsicker

 

 

 

      Senior Executive Vice President,

 

 

 

      Chief Operating Officer, Secretary and   

 

 

 

     Chief Financial Officer

 

 

 

 

42

 


 

 

EXHIBIT INDEX

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit

 

 

 

 

Number

 

Description

 

 

3.1

 

Articles of Incorporation as amended (conformed) (Incorporated by reference to Exhibit 3.1 of

 

 

 

 

Registrant’s Form 10-Q filed on May 14, 2010).

 

 

3.2

 

By-Laws (Incorporated by reference to Exhibit 2 of Registrant’s Form 8-A filed on December 11, 2008).

 

 

11.1

 

The statement regarding computation of per share earnings required by this exhibit is contained in Note 5

 

 

 

 

to the financial statements under the caption “Basic and Diluted Earnings Per Share.”

 

 

31.1

 

Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).

 

 

31.2

 

Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).

 

 

32

 

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 1350

 

 

 

 

of the Sarbanes-Oxley Act of 2002.

 

 

 

 

The following Exhibits are being furnished* as part of this report:

 

No.

Description

101.INS

XBRL Instance Document.*

101.SCH

XBRL Taxonomy Extension Schema Document.*

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.*

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.*

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.*

101.DEF

XBRL Taxonomy Extension Definitions Linkbase Document.*

______________________

* These interactive data files are being furnished as part of this Quarterly Report, and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections. 

43